Eon chief warns US energy advantage makes Europe uncompetitive

David Fuller's view The head
of Germany's largest utility has warned it will be years before Europe can hope
to counter the US's growing advantage in energy costs and predicts that the
disparity will meanwhile lead heavy industry to abandon the continent.

Johannes
Teyssen, chief executive of Eon, said there were no obvious options for Europe
to narrow the US advantage - whether by drilling for shale gas, importing more
liquefied natural gas or importing inexpensive US supplies.

"There
is a competitive advantage for America that we cannot prevent, at least for
some time," Mr Teyssen told the Financial Times. He said it was "a
dream" for politicians to suggest otherwise. "It will take years and
long years of innovation before we can start to shrink it," he added.

Mr Teyssen's
comments will add to growing concerns in Europe that high energy prices are
encouraging manufacturers such as chemicals companies to shift investments across
the Atlantic, where the shale bonanza has reduced natural gas costs to between
a quarter and a third of those in the EU.

The issue
was discussed at a summit of EU heads of government in Brussels in May and is
expected to be a priority for a new German government.

"The
price difference is unnerving some companies and deciding their investments,"
Mr Teyssen said, adding that the US advantage was "getting so big we cannot
allow it to continue".

Even
if Europe put aside its environmental concerns and decided to pursue natural
gas fracking, it would take at least five years to develop such an industry,
he predicted. Instead, he said, the continent was more likely to benefit if
China and Australia pushed ahead with the technology because it would free up
gas from Qatar and other world suppliers.

"The
indirect fracking effect is probably the one that helps Europe the fastest -
not direct fracking," Mr Teyssen said.

With
few other options at hand, Mr Teyssen argued that European politicians concerned
about industrial competitiveness should focus on repairing an EU energy policy
that was becoming increasingly dysfunctional. "There have been a lot of
good intentions...but things are now just getting out of control," he said.
"European power is getting dirtier. The CO2 content is increasing in spite
of the renewables. It is unaffordable, and it's losing its security. So the
alarm signs are tremendous."

A priority
for utilities is to rein in generous subsidies for renewable energy that have
underwritten a boom in solar and wind power across the continent. Mr Teyssen
blamed such support schemes - along with laws in Germany and other member states
that prioritise renewables - for distorting the market. One consequence is that
Eon has been forced to mothball gas-fired plants that are efficient but no longer
profitable.

My
view - Continental Europe is an extraordinarily
interesting, diverse and wonderful region to visit. Unfortunately, its governments
have a lot to answer for, and not least in recent years. Germany is now burdened
with expensive and inefficient windmills. It is also closing down rather than
modernising its nuclear reactors. To date, it has turned its back on fracking
for natural gas, as have many other European countries.

France
has the cleanest and most competitive energy policies of any large European
country, thanks to the vision
of Prime Minister Pierre Messmer following the 1973 global oil crisis. Unfortunately,
following Fukushima, President Francois Hollande has promised to cut France's
energy mix from 75% nuclear power to 50% by 2025. New nuclear would be safer
than the aging plants and also increase France's energy advantage, whereas acres
of solar farms will be a NIMBY issue and considerably increase energy costs.

Tim Price: Return of the cockroach - My
thanks to the author for his refreshingly
independent report published by PFP Wealth Management. Here is a brief sample:

This
multi-asset fund has, over the last decade, handily outperformed the broad US
stock market, despite carrying less risk. This is probably what most investors
realistically want. In passing, we also note that the fund's shorter term performance
has been negative, with year-to-date returns of -7.6%. Is the model broken ?
Does it no longer make sense to diversify across multiple asset classes ? Or
is it simply that over the shorter term, markets are inherently volatile, and
those in instruments like gold doubly so ? We think the latter.

Last
week we also had the opportunity to attend Didasko's Practical History of Financial
Markets course in London, taught by Andrew Smithers, Stephen Wright, Gordon
Pepper, Michael Oliver, Peter Warburton, Herman Brodie and Russell Napier. We
can only echo the testimonial of Sebastian Lyon of Troy Asset Management, who
described the course as:

"The
best and most valuable two days I have spent outside the office in twenty years
(holidays excepted). In a field which remains mired in short-termism and brevity
of memory, all aspiring and experienced fund managers should attend this course.
They will gain the invaluable advantage of historical perspective."

My
view - Veteran subscribers may recall that Tim
Price has often mentioned diversified, multi-asset funds. These have generated
considerable interest, not least because of their respectable performance which
has often outperformed Wall Street or any number of stock markets over the last
10 to 15 years, and without the volatility of equities.

The secret
of a good stew is in the quality and weighting of its ingredients. Chefs will
have their favourites, as will investment managers when determining the menu
for their multi-asset funds. However, ensuring a long-term supply of successfully
balance ingredients for a fund is more difficult for the investment manager
than the chef's task of recreating a satisfying stew every year.

For those
seeking more than just conceptual comfort from the diversified approach, a US
mutual fund, the Permanent Portfolio, ticker PRPFX, is managed along very similar
lines to those advocated by Harry Browne. This is a $12 billion fund invested
in bullion (25%), US Treasury securities and similar assets (35%), Swiss franc
assets (10%), real estate and natural resource stocks (15%) and growth stocks
(15%). Its 10 year historic returns are shown below:

My
guess is that unless that 35% weighting in US Treasury securities and similar
assets is lowered and / or shifted to short-dated maturities, it will be a headwind
for the next couple of generations. Meanwhile, the PRPFX chart remains rangebound
and requires a sustained break above 50 to reaffirm the prior uptrend. Conversely,
this pattern will look like a top area on a decisive
break beneath 45.

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